CPSE ETF FFO







Allotment Link :  CPSE ETF Floor price has been fixed at 26.8504
Click Here for Checking Allotment from karvy
( Choose Fund name as Reliance Mutual Fund, Purchase)
Reported allotments is 5503 on 2 Lakh application amount and full allotment till 5000 units.


The government plans to garner up to Rs 2,5000 crore by selling units of the CPSE ETF by launching a follow on public fund offer which opens on 14/03/2017 for non retail investors and on 15/03/17 for Retail investors. CPSE stands for central public sector enterprises, and ETF for exchange-traded fund. CPSE ETF is a basket of 10 public sector undertakings where the government had sold shares in small quantities way back in May, 2014. An ETF, or exchange-traded fund, is a marketable security that tracks a basket of assets such as stocks. In contrast to mutual funds, it trades like a stock. A 3.5% upfront discount has been offered to lure investors to invest in this fund. This marks an reduction from earlier 5% discount in earlier sale offer in Jan 2017. While the past performance of CPSE ETF funds is reasonably good and last CPSE ETF gave windfall returns (3-7%),  there are some  red flags that an investor has to keep in mind while investing in this CPSE ETF Further fund offer(FFO) 2. The review of this offer is aimed to held investors take an informed decision.

Update:Final Subscription CPSE ETF FFO 2; Subscription overall 3.7x , Institutions 7.6x, Retail 2x  (1.2 Lakh applications)
Update Anchor Investors: CPSE ETF FFO 2 anchor portion of Rs. 750 crore gets bids for 5700 crore  i.e. 7.5x subscription. 
CPSE ETF FFO 2 (Further Fund offer 2 or Tranche III)

  • FFO Application – Anchor Investors: 14/03/2017 
  • FFO Application- Retail & Non Retail Investors:  15/03/2017 to 17/03/2017
  • Listing : Units offered under FFO 2 scheme will be listed on or before April 07, 2017 on both exchanges
  • Issue Size: Rs 2,500 crore
  • An upfront discount of 3.5% is  being offered to all category of investors.on the “ CPSE ETF FFO Reference Market Price”.
  • Investment in CPSE ETF scheme qualifies for deduction under Rajiv Gandhi Equity Saving Scheme (RGESS) and thus of 50% of the investment  amount can be deducted from the taxable income under the Section 80 CCG of the Income Tax Act.
  • The Fund is being managed by Reliance Nippon Life Asset Management Limited (RNLAM) which had been managing the fund by virtue of their taking over Goldman Sachs who were initially manages to the fund when it was launched way back in 2014.
  • The Scheme invests at the minimum  95% of its total assets in Nifty CPSE Index stocks and can at the maximum invest 5% in Money Market Instruments like include T-Bills, CP (commercial paper) etc.
The CPSE ETF Scheme 

CPSE stands for central public sector enterprises, and ETF for exchange-traded fund. CPSE ETF is a basket of 10 public sector undertakings where the government had sold shares in small quantities when CPSE ETF’s New Fund Offer (NFO) was first launched in March, 2014 with an issue size of Rs. 3,000cr. The NFO received good response. The ETF was listed on 4th April, 2014. The ETF was launched by Goldman Sachs Asset Management (India) which was later acquired by Reliance Mutual Fund in October 2015. The second tranche or CPSE ETF FFO offer was launched on Jan 17,2017. This raised Rs. 6000 crore and got good response from institutions. Retail participation was luke warn and they put in only Rs. 1000 crores. However subsequent bumper gains may see a significant Retail participation in this round.
The scheme tracks CPSE Nifty index which was formed on 1st January 2009 with a base value of 1000. The CPSE ETF scheme comprised of 10 selected PSUs (Maharatna and Navratnas) and were selected on investor friendly criteria. List included ONGC, Coal India, Oil India, IOC, Gail, Container Corp., Bharat Electronics, Engineers India, Power Finance and Rural Electrification. It also had a loyalty addition as well as bonus attractions in Tranche 1 which now seems to have been done away with. Selections of these companies were done on following characteristics:

  • Having more than 55% government stake
  • Average free float market capitalization of more than Rs.1,000 crore for six month period ending June 2013
  • Having paid dividend of not less than 4% including bonus for 7 yrs immediately preceding or for at least seven out of the eight or nine years immediately preceding, are considered as eligible companies as on cut-off date i.e. 28-Jun-2013.
  • CPSE ETF, tracks NIFTY CPSE Index constituting 10 central public sector enterprises. CPSE ETF Composition as on Feb 28, 2017 is as follows:
SnoCompany Name% Weight
1ONGC24.59
2Coal India19.61
3IOC18.35
4Gail (India)11.65
5Rural Electrification Corporation5.78
6Power Finance Corporation5.54
7Container Corporation of India4.99
8Bharat Electronics4.11
9Oil India2.99
10Engineers India1.99
CPSE ETF Performance:
CPSE ETF  vs NIFTY Chart Price Performance of CPSE ETF vs NIFTY (Since Inception)
Period% Gain NIFTY% Gain CPSE ETF
Last 1 Month ( on 10/03/17)1.6-0.79
Last 3 Month ( on 10/03/17)9.347.57
Last 1 Year (on 10/03/17)18.9645.25
Since Inception (on 10/03/17)30.1143.88
While CPSE ETF has outperformed the NIFTY  on an overall basis since its inception, a large portion of this growth came in in  2016 from Oil, gas sector and Power PSUs like REC & PFC. IN last 3 months as well as one month it is lagging behind NIFTY in performance. ,/p>
Retail allotment procedure in CPSE FFO 2:

If the Subscriptions received from the Retail Individual Investors and Qualified Institutional Buyers (Retirement Funds) during the FFO 2 Period is in excess of the Retail Individual Investor and Qualified Institutional Buyers (Retirement Funds) Portion, the excess so received will be refunded to the Investors subject to the following:

a) To the extent Retail Individual Investors and Qualified Institutional Buyers (Retirement Funds) have Subscribed

(i) upto 5,000 FFO 2 Units, all such Investors will be provided full allotment upto 5000 FFO 2 Units (subject to section on Allotment below and the Subscription amount paid by such Investors), and

(ii) for more than 5,000 FFO 2 Units, all such Investors will be provided allotment of a minimum of 5000 FFO 2 Units (subject to section on Allotment below); however, if the total value of such allotments would be in excess of the Retail Individual Investor and Qualified Institutional Buyers (Retirement Funds) Portion, all Investors will be provided equal allotment.

b) all Investors who have applied for investing more than 5000 FFO 2 Units will be given allotment of any remaining FFO 2 Units (up to the Retail Individual Investor and Qualified Institutional Buyers (Retirement Funds) Portion) after allotments made under paragraph (a) above, pro-rata to their application amounts in excess of 5,000 FFO 2 Units.

Hence it makes more sense to apply upto 5000 units only. (  See Page 40 of the Offer document Click for offer document

Assessment
  • The CPSE ETF presents an opportunity to investors to take exposure to some of the best performing PSU companies across different sectors with relatively less stock specific risk as the risk gets diversified among the basket of stocks from different sectors. The favorable policy outlook amid a reform oriented government augurs well for these companies.
  • The fund has a  portfolio of 10 stocks and the sectors ‘Energy’  & ‘ Oil and Gas’ dominates the fund which is a double edged sword. The funds performance in last year has been fulled to a large extent by oil & Gas sector stocks and on the back of pull back in energy stocks like REC, PFC and Defence sector stock BEL. This cannot be said with certainty for coming months. 
  • The CPSE ETF has delivered an absolute return of 43.88% since its launch on April 4, 2014 against Nifty 50 which delivered a return of 30.11% during the same period. (as on March 10, 2017).
  • The PE ratio of NIFTY CPSE index has stood in region of 11-12 x cs 21-22x  of NIFTY 50 index. The poor discounting of the NIFTY CPSE index is on account of lower confidence of investors in Government controlled PSUs. 
  • The dividend yield of NIFTY CPSE index was 3.74% and that of NIFTY 50 index was 1.25% as on Feb 28, 2017. Thus from consideration of dividends  alone, the CPSE fund is a good bet. 
  • The CPSE ETF charges an annual fee of 0.065 % of total assets. This is significantly lower than many other funds with PSU exposures as they have an expense ratio upwards of 2.25%. 
  • The government is also looking to launch one more CPSE ETF, with different underlying shares. This ETF is being managed by ICICI Prudential Mutual Fund and is expected to be launched in coming  months.
  • The Government has offered a 3.50% discount to all categories of investors which is lower than  earlier two CPSE ETF offers. 
  • Apart from external factors affecting the market, the funds performance depends on select PSUs most of which are are large and are characterized by inertia and slow pace of change and a not very inspiring work culture and management.
  • The fund is coming at a time when market may be in a bit euphoric mood due to results of recent assembly elections.Units offered under FFO 2 scheme will be listed on or before April 07, 2017 on both exchanges and market conditions cannot be cannot be ascertained at that point of time.
  • Though the performance of the fund has been satisfactory, Overall investors have a mixed feeling with PSUs  Investors in general have many bitter experiences of investing in PSUs & OFS of PFC, REC and recent MOIL OFS are giving -ve return. 
  • Due to Holi festival, Grey Market Premium or Kostak is not yet known. 
  • Investors with low exposure to PSUs  stocks can subscribe with a medium term perspective as a bit conservative and defensive bit. However some of the constituents like Coal India are likely to come out with large OFS which can act as a check on their prices. 
  • The Markets could remain bit elevated due to recent political gain by party at the centre which could result in a higher floor price which may or may not sustain at the time of listing.
  • The reduction of discount from 5% from 3.5% has not only lower the potential gain which investors can pocket but also has increased the risk.
  • In CPSE ETF FFO which opened in Jan 2017, investors were allotted units at Rs. 25.214 and based on price of 27.7 on 10/03/17, investors are sitting on a gain  of approx 7% in slightly  less than two months time.
  • The CPSE ETF FFO 2 size is Rs. 25000 crore compared to earlier Rs. 6000 size and investors  though shied away for FFO 1 which gave good gains, may make a beeline for CPSE ETF FFO 2  resulting in over subscription and lower allotment which may cap potential gains even in case of an uptrend. 
  • Despite the arbitrage lure, there are  price risks associated with few weeks holding as underlying PSU performance may have peaked considerably, upcoming heavy disinvestment program of government leading to increase availability of PSU stocks and discount safety is less. On the other side one cannot rule out a small uptrend in CPSE ETF price itself if a secular bull run sets in place after these elections. Will watch the trend in next 2 days and at this juncture I intend to take a small exposure to this CPSE ETF FFO 2 offer.

Standard disclaimer: I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.